Muni Finances – Fix The Underlying Problem

I started to write a post about this topic this morning, but deleted it in frustration.  Instead, I’m just going to bang out a short and simple one on the topic: Muni Bankruptcies.  
Here’s the bottom line – the current talk about municipal bankruptcies is designed to fix the past problems – obligations we’ve already rung up –  but doesn’t address the underlying problem which, uncorrected, will guarantee that we have this discussion again in 15, 30 or 50 years.  That problem is defined benefit pension plans which are based on overly aggressive underlying return assumptions.
All the bankruptcy chatter is designed to alleviate the past obligations – but we also need to fix the FUTURE obligations, and I don’t see that being addressed.  I come from a family of teachers – my father, my mother, my sister, my brother in-law – all teachers.  My sister says “But I contribute more to my pension than Mom did,”  and I reply, “Yeah, but that extra 2% doesn’t make up for the fact that the return assumptions internal to your fund are higher than reality is likely to deliver.”  I’ve addressed that part of the equation previously.  Switch to defined contribution plans (and yes, taxpayers, once the deficits are shored up, can provide matching funds if needed), and let the employees invest it however they want, or even have the pension fund manager invest it for them.  That way, if the return assumptions turn out to be accurate, they’ll reap the benefits anyway.
End defined benefit plans in favor of defined contribution plans.  Otherwise, we’re destined to repeat this pension boom-bust cycle indefinitely. 
-KD
ps – There are other modifications that should be made too, of course, like ending the “gaming” of baseline salary numbers by employees who collect massive amounts of overtime in their last few years of work and receive annual pensions based upon an inflated baseline.

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